The New Arthurian Economics

Tuesday, September 18, 2012

Sumner's critique meshes together policy goals with actual policies so that evaluations of whether a policy (say, "looser money") is simply being pursued is treated synonymously with whether a goal we all like (say, "NGDP back to target levels") has been achieved.

...for market monetarists like Scott Sumner, who seem interested in going beyond decision rules and actually offering an analytic claim, there seems to be no way to logically make the statement "we have done the market monetarist policy rule and the goal was not achieved". Why? Because if NGDP level targets have not been reached then by definition you haven't been doing market monetarist policy.

It's one thing to say that different economic conditions call for different rates and base money supplies, and to note the difference between a nominal and real rate. It's another thing entirely to say that rates and the base should be ignored and that we should focus our attention on NGDP as a measure of the policy stance, because the whole scientific question at hand is "how does monetary policy (OMOs that affect the base and short rates and maybe long rates for QE) impact NGDP in a depression?"

I don't normally take a particular Popperian attitude towards science, but the whole problem here can be summed up as the problem of market monetarism (at least as presented by Scott Sumner) can't really be falsified.

An excellent criticism, I think.

UPDATE 20 Jan 2013

Just yesterday I came across this conclusion in a post by Scott Sumner:

Woodford and Bernanke are right; the stance of monetary policy depends on outcomes like NGDP growth and inflation, not interest rates and the money supply.

It's precisely the thing Daniel Kuehn criticized as not falsifiable in Sumner's work:

Sumner's critique meshes together policy goals with actual policies so that evaluations of whether a policy (say, "looser money") is simply being pursued is treated synonymously with whether a goal we all like (say, "NGDP back to target levels") has been achieved.